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FISCAL POLICY( FP )
FP refers to the policy of the Govt w r t
Taxation - various kinds of taxes such as
Direct & Indirect
Public Expenditure - Various Methods and
procedures of Public Expenditure
Public Debt- Various methods of Borrowing

2. Meaning: Fiscal policy is a recent development in the context
of economic regulation and management. It is similar like
monetary policy. Fiscal policy had its birth almost after World
Wide Depression in 1930.It was popularized by the
publication of “General Theory” of J.M.Keynes in 1936.Fiscal
policy has today become a major instrument employed by
Govts to achieve economic growth.
Definitions:
1.According to Arthur Smith," Fiscal policy refers to a policy
under which government uses its expenditure and revenue
programmes to produce desirable effects on national income,
production and employment”
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3. 2.According to A.G.Buehler, “By fiscal policy it
means the use of public finance expenditure, taxes,
borrowing and financial administration”
In simple fiscal policy refers to the policy of the govt
as regards taxation, public borrowing and public
expenditure with specific objectives in view.
Objectives of Fiscal policy:
1.Economic growth
2.Full employment
3.Optimum allocation of economic resources
4.Increasing rate of investment
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4. 5.Reducing inequality of income and wealth
6.Controlling inflation
The above objectives are attained through the
purposeful manipulation of public expenditure,
public debt and taxes.
Instruments of Fiscal Policy:
The govt of a country, both at the centre and in the
states, is directly responsible for implementing fiscal
policies of the nation.Govt revenue, expenditure and
borrowings are the three instruments of fiscal
policy. These three instruments are operating
through the govt budget.
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5. 1.Public Revenue –Taxation ( source of revenue)
a) Direct taxes
b) Indirect taxes
Developed countries prefer direct taxes
Developing countries prefer more on indirect taxes
2.Public Expenditure – ( spending)
a) Development expenditure
b) Non-development expenditure
Public expenditure has been increasing at a faster
rate
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6. 3.Public borrowing – ( loans )
a) Internal debt
b) External debt
c) Deficit financing
Types of Fiscal Policy:
There are two types of fiscal policy
1.Automatic stabilizers fiscal policy – Built in the
system automatically without deliberate action of
the govt.There are two automatic stabilizers viz, i)
changes in tax revenues ii) unemployment
compensation and welfare payments
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7. 2.Discretionary fiscal policy – It implies deliberate
changes undertaken by the govt of a country in the
tax rates and planned expenditures in an effort to
stabilize the economy.
Problems of Fiscal policy:
1.Fiscal policy takes time to work - delay
2.Problems in tax policy
i) Loopholes in tax laws
ii) Large non-monetized sector
iii) Exemption of agricultural income
iv) Inefficient and corrupt administration
3.Burden of public debt – internal and external
4.Deficit financing
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8. Taxation
A Tax is a compulsory contribution.
Canons of Taxations: Smith’s
Canons
 Canon of Equity.
 Canon of Certainty.
 Canon of Convenience
 Canon of Economy
Modern Canons
 Canon of Simplicity
 Canon of Productivity
 Canon of Elasticity
 Canon of Diversity
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9. Direct and Indirect Taxes
Impact - Shifting- Incidence
Direct Taxes
Merits Demerits
I Just and Equitible i Arbitrary
ii Progressive ii Unpopular
iii Elastic iii Inconvenient
iv Productive iv Evasion
v Economical v Uneconomical
vi Effective vi Narrow base
vii Certain vii Tax on Honesty
vii Educative Value
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10. Indirect Taxes
Merits Demerits
i Convenient i Unjust
ii No Evasion ii Inequitable
iii Broad Tax Base iii Inflationary
iv Social Value iv Uncertain
v Economical v Savings Affected
vi Effective vi Not Economical
vii No Pinch vii No Link between
viii Progressive Tax-Payers & Govt
viii Tax by Cruelaty
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